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Here's Why Renewable Energy Group Dropped Over 10% Today

By Maxx Chatsko - Jun 11, 2020 at 12:46PM

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The small-cap stock hit an all-time high earlier this month, but gloomy economic outlooks have investors rethinking the company's valuation.

What happened

Shares of Renewable Energy Group (REGI) fell as much as 11% today as investors digested the economic briefing given by the Federal Reserve yesterday afternoon. Although there are many moving parts and much uncertainty in economic projections right now, the nation's top economists predict it will take years to undo the damage from the coronavirus pandemic. The sobering outlook is weighing heavily on stock markets and commodity prices that had been rising higher in recent weeks.

Renewable Energy Group is particularly dependent on commodity markets. It is the nation's top producer of biomass-based diesel fuels, and low crude oil prices and reduced demand for distillate fuels will certainly hurt the business in 2020 and 2021. So, too, will rising feedstock prices and concerns over shortages. Considering major crude oil benchmarks were down over 7% today and small-cap stocks touched all-time highs earlier this week, it's not too surprising shares are cooling off today.

As of 12:21 p.m. EDT, the renewable fuels stock had settled to a 10.7% loss.

An arrow crashing through the bottom axis of a chart.

Image source: Getty Images.

So what

On the one hand, today's stock movement makes sense. Biomass-based diesel prices are in part based on petroleum-based diesel prices, which are largely determined by crude oil prices. When crude oil prices decline, the selling prices of transportation fuels aren't far behind. 

On the other hand, investors might not expect the share price to remain subdued for too long. Renewable Energy Group earns a tax credit of $1 per gallon for the blended fuels it sells, which provides a backstop against volatility in commodity markets. Additionally, diesel fuels haven't experienced the same decline in demand as gasoline or jet fuel. 

Now what

It may seem counterintuitive given the volatility and uncertainty in crude oil markets, but the nation's largest producer of biomass-based diesel fuels might be well positioned to maintain at least stable operations in 2020 and 2021. It helps that Renewable Energy Group had a book value of $1.19 billion at the end of March, which is roughly the market valuation investors might expect the company to maintain.

Well, at least until second-quarter 2020 operating results are reported later this summer. If the business proved resilient during the strictest period of stay-at-home orders in April and May, then investors are likely to breathe a sigh of relief and refocus their attention on long-term growth projects. 

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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